Apple has posted iOS 4.2.8 for the CDMA (Verizon) iPhone 4 and iOS 4.3.3 for the GSM (AT&T) iPhone to patch privacy problems with its location tracking system. (The update is available via iTunes.)

This update contains changes to the iOS crowd-sourced location database cache including:
- Reduces the size of the cache
- No longer backs the cache up to iTunes
- Deletes the cache entirely when Location Services is turned off

Macintouch

Note: All iPhone iOS updates (so far) take more than an hour on my DSL connection to download. There's no iPhone eject button during that time, and I'm not willing to test what happens if you just pull the plug while the update is downloading.

BTW, if you want to delete the file of wifi hotspots and cell towers on your iPhone, go to Settings > General > Location Services. Turn Location Services off (see item 3 above). Now turn Location Services back on. While you're there, you might review all the apps authorized to use location services. If any of those settings are inappropriate, turn them off.
If you're really paranoid, you could then plug your iPhone in to back it up, then delete previous backups from your Mac. (iTunes > Preferences > Devices). For what it's worth, my iTunes only contained the one backup, so I suspect that Apple has done this for you.

Just a reminder that this file is not a record of the location of your iPhone. Instead, it's a file downloaded from Apple's servers, which keep crowdsourced data of wifi hotspots and cell towers. The downloaded file is a subset of that data relevant to your current location.

If any of this is really, crucially important to you, consult your lawyer and/or section chief.

"Design is not just what it looks like and feels like. Design is how it works."
Steve Jobs